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Energy Insurance Mutual


... Beachwood Ohio OakBridge is an insurance intermediary specializing in management liability ... outside Financial Sectors ... Shareholder Suits 43 ... – PowerPoint PPT presentation

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Title: Energy Insurance Mutual

Energy Insurance Mutuals 2008 Risk Managers
Information MeetingFebruary 25, 2008Omni
Orlando ResortOrlando, FL
Kevin M. LaCroix, Esq.
  • Partner, OakBridge Insurance Services, LLC,
    Beachwood Ohio
  • OakBridge is an insurance intermediary
    specializing in management liability insurance
    placements for public and private companies, as
    well as private equity and venture capital funds
    and other alternative investment vehicles.
  • 1995 to 2005 President, Genesis Professional
    Liability Managers, Inc. (a Berkshire Hathaway
  • Previously, Partner, Ross, Dixon Bell,
    Washington, D.C.
  • Professional Liability Underwriting Society
  • President (2004)
  • Board Member (1999-2005)
  • Foundation Board Member (current)
  • Co-Chair, PLUS D O Symposium, 2007 and 2008
  • Author, The D O Diary (Internet weblog)

Current Issues in D O
  • Global Climate Change
  • Emerging Frequency Issues
  • Subprime-Related Litigation
  • Other Frequency Trends
  • Options Backdating Update
  • Important Legal Developments
  • Tellabs, Stoneridge
  • Class Action Trials JDS Uniphase, Apollo Group
  • Emerging Issues
  • Class Action Opt-Outs, FCPA

Global Climate Change
  • Scientific Issue
  • Political Issue
  • Economic Issue
  • Legal Issue
  • Property Damage, Bodily Injury Liability Issues
  • Investor Liability Issue

Important Context for D O Liability Issues
  • Supreme Courts April 2007 Decision in Mass. v.
  • Existing SEC Disclosure Requirements
  • Growing Sentiment for Additional Disclosure
  • Shareholder Expectations

Massachusetts v. EPA (U.S. Supreme Court, April
2, 2007)
  • Holding EPA violated Clean Air Act (CAA) by
    improperly declining to regulate new vehicle
    emissions standards to control for carbon dioxide
  • Court did not rule
  • CAA or EPA should regulate mobile source emission
  • Auto companies should be liable for emissions
  • Two Particularly Significant Elements of Courts
  • Harm from climate change can confer standing to
    sue EPA for failure to comply with CAA
  • Greenhouse Gas Emissions (GGE) are pollutants
    under the CAA.

Existing SEC Disclosure Requirements
  • Regulation S-K, Item 101(c)(1)
  • Companies must disclose material effects of
    compliance with environmental regulations
  • As new regulations and expectations accumulate,
    Item 101 Environmental Disclosure will become
    more significant
  • Regulation S-K, Item 303
  • Companies required to disclose material risks,
    trends and uncertainties that could impact
    revenue or income.

Recent SEC Environmental Disclosure Actions
  • ConAgra Foods (June 29, 2007)
  • Company reversed 35 million of legal and
    environmental expenses to income
  • Company allegedly misleadingly failed to disclose
    that at least 23.8 million of the reserves were
    excess in prior periods
  • One of several allegedly improper practices that
    misstated companys financial performance
  • CFO paid 425,000 disgorgement
  • Safety-Kleen (Sept. 12, 2002)
  • Company allegedly created fictitious income by
    reducing several environmental reserve accounts
  • CFO later plead guilty to criminal securities

SEC Enforcement (contd)
  • Ashland, Inc. (November 28, 2006)
  • Director of Environmental Remediation allegedly
    improperly reduced environmental remediation
    estimates by approximately 160 million
  • Materially understated reserves, understated
  • Company agreed to internal control changes

July 26, 2007 Jenner Block Legal Memo
  • The SEC has turned its attention on
    environmental financial disclosures.
  • Corporations and corporate executives should
    certainly be cognizant of the increased number of
    civil and criminal actions being brought by the
    SEC against corporations and officials who fail
    to observe existing environmental reporting

Disclosure Recent Developments
  • September 14, 2007 NY AG Andrew Cuomo Subpoenas
    Five Major Energy Companies
  • AES Corporation, Dominion Resources, XCEL Energy,
    Dynegy, Peabody Energy
  • Demanded Information Regarding Their Analysis of
    Climate Change related financial, regulatory and
    litigation Risks
  • Strongly suggested the need for greater
  • September 18, 2007 CERES SEC Disclosure Petition
  • CERES, Environmental Defense Fund, 22 other
    petitioners (including public pension funds,
  • Asks SEC to issue interpretive guidance
    clarifying obligations to disclose climate change
    financial impacts

Recent Developments (Continued)
  • January 10, 2008 CERES and Risk Metrics Report
  • Assessment of 40 largest global banks
  • Measured how banks are addressing climate change
    through board oversight, management execution,
    public disclosure, greenhouse gas emissions
    accounting and strategic planning
  • February 11, 2008 Institutional Investors Group
    on Climate Change and CERES Electric Utility
    Disclosure Framework
  • will make it easier for investors to assess and
    compare risks and opportunities posed by climate
  • captures those climate change issues that are
    relevant specifically for electric utilities
  • a unique format for presenting quantitative and
    qualitative issues in a coherent way

Recent Developments (contd)
  • Oct. 18, 2007 Senators Lieberman and Warner
    introduce Americas Climate Security Act of 2007
  • Introduces Carbon Emissions Cap and Trade System
  • Directs the SEC to confirm Under Items 101 and
    303 of Reg. S-K that global warming constitutes
    a known trend
  • Bill still before the Committee on the
    Environment and Public Works

  • Mounting Pressure by Investors, Shareholders,
    Regulators to evaluate financial impacts from
    climate change
  • Investor Groups Are Focused on Disclosure Issues
  • In 2007, more than 43 shareholder disclosure
    responses were filed with U.S. Corporations
  • Average shareholder support was 21
  • Heightened Expectations Could Create Disruptive
    Disclosures or Allegations of Omissions

  • BOTTOM LINE In this environment, it is prudent
    to assume that investor claims and other D O
    claims will arise
  • BETTING LINE Securities Litigation Watch
    Over/Under Date of May 31, 2008

Insurance Implications
  • Most Policies Do Not Explicitly Address Climate
    Change or Global Warming Issues
  • Standard Pollution Exclusion in Many D O
  • Tailored to Specific Existing Environmental
  • AEGIS Policy Omits Pollution Exclusion
  • Most Insurers Will Amend to Carve Back Coverage
    for Securities and Derivative Claims
  • pollutants Does not necessarily include GGE?
  • Concerns
  • Carve back language should avoid presumption that
    the claims will arise in the U.S.

Insurance Implications (contd)
  • Bodily Injury/Property Damage Exclusion (BIPD)
  • Avoid having the BIPD exclusion taking away carve
    back coverage grant
  • For wording preferable rather than based upon,
    arising out of, etc.
  • Rescission Issues
  • Some carriers are starting to introduce climate
    change issues in renewal applications
  • Increased Significance of Full Severability and
    limited Imputation

Insurance Implications (contd)
  • Side A/Difference in Condition (DIC)
  • Increasingly standard part of D O insurance
  • Many Side A/DIC policies omit the pollution
  • Potential drop down coverage if traditional D O
    policy is unavailable due to coverage preclusion
    or otherwise

Class Action Frequency Trends Overview
  • Two-Year Lull Between July 2005 and July 2008
  • Second Half of 2007 SCA Filings Returned to
    Historical Levels
  • Number of Filings During November 2007 Highest
    since January 2004
  • Subprime Litigation was Most Important Factor,
    but NOT the only factor
  • Over 80 SIC Code Categories
  • Significant other groups include Pharmaceuticals
    (14) Semiconductors (7) Radio Telephone
    Equipment (6)

Class Action Trends Subprime
  • Subprime-related Shareholder Suits
  • 43 Securities Class Actions
  • 9 ERISA/401(k) Lawsuits
  • Source The D O Diary (as of 2/12/08)
  • Many Types of Defendants
  • Loan Originators Securitizers Residential Home
    Builders Bond Insurers Credit Rating Agencies
  • Spreading Wave
  • Defendants outside Financial Sectors
  • Defendants Outside NY, CA, FL
  • Other Professional Defendants (Accountants,
    Offering Underwriters)

Class Action Trends Subprime (contd)
  • Likely to Continue to Emerge Well Into 2009
  • Plaintiffs Lawyers Estimate More SCAs in 2008
    than any year since PSLRA (1995)
  • Significant Challenge for Professional Liability
    Insurance Industry
  • Estimated Losses Range 3 bb to 8-9 bb
  • Underwriting Response?
  • Limited to Financial Institutions (so far)
  • Has not affected Capacity, Pricing (so far)

Options Backdating Update
  • Lawsuit Scoreboard
  • 36 Securities Class Action Lawsuits (including 2
    in 2008)
  • 166 Shareholder Derivative Lawsuits
  • 4 ERISA/401(k) Lawsuits
  • Class Action Resolution Scoreboard
  • 3 Dismissals, 7 Settlements Totaling 244 mm
  • 26 SCAs Remain Pending
  • Derivative Lawsuits Resolution Scoreboard
  • 21 Dismissals, 17 Settlements Totaling 60 mm
  • (Not Counting 900 mm UnitedHealth Group
  • 128 Cases Remain Pending
  • Source The D O Diary (February 12, 2008)

Options Backdating Update (contd)
  • Known settlements total over 300 mm (not
    including UnitedHeath Group)
  • Many more settlements to go, substantial defense
    fees continue to accrue
  • Bottom Line Backdating Will Prove to Have Been a
    Big Deal for D O Insurers

Supreme Court Case Developments
  • Tellabs, Inc. v. Makor Issues Rights, Ltd.
    (June 2007)
  • Courts must weigh competing inferences in order
    to determine whether allegations raise a strong
    inference of scienter
  • Inferences must be cogent and at least as
    compelling to survive motion to dismiss
  • Portrayed as defense victory, but in reality
  • On remand to the 7th Circuit, applying Supreme
    Court standard, once again reversed district
    courts dismissal
  • BOTTOM LINE Balanced approach unlikely to have
    significant impact on many cases

Supreme Court Case Developments (contd)
  • Stoneridge Investment Partners LLC v. Scientific
    Atlanta (January 2008)
  • Court rejected scheme liability claims against
    secondary actors (vendors) alleged to have aided
    primary violators misrepresentations
  • IF case had gone the other way, would have been a
    plaintiffs victory and significant increase in
    exposure, BUT
  • BOTTOM LINE Actual outcome essentially a Status
    Quo Decision
  • Unsurprising outcome given prior Central Bank
  • Third parties can still be held liable as primary
  • SEC still has statutory scheme liability
    enforcement authority

A Rare Spectacle Two Class Action Trials
  • November 27, 2007 JDS Uniphase Trial
  • Defense Jury Verdict
  • January 16, 2008 Apollo Group Trial
  • Plaintiffs verdict, Damage Award up to 277
  • Both Cases Still Pending, Likely to Appeal
  • Significance?
  • Are cases more or less likely to go to trial?
  • Will magnitude of Apollo verdict embolden
  • Potential threat to insurance coverage?

Emerging Issues
  • Class Action Opt-Outs
  • Unprecedented Settlements
  • AOL Time Warner Opt out settlements 795 million
  • Qwest 410 mm Opt Out gt 400 million opt outs
  • Just an vestige of Corporate Scandals or Lasting
  • Challenge for Insurers and for Policyholders
  • Loss Estimates, Reserving
  • Claims Settlement
  • Limits Adequacy

Emerging Issues (Contd)
  • Foreign Corrupt Practices Act (FCPA)
  • Record Number of 2007 Enforcement Actions
  • Record Fines and Penalties
  • Increasing Trend toward Follow on Shareholder
  • Derivative Lawsuits Baker Hughes, Siemens, BAE
  • Class Action Lawsuits Willbros Group (10 mm)
    Immucor (2 mm)

(No Transcript)
The D O Diary
  • The D O Diary
  • http//

Contact Information
  • Kevin M. LaCroix
  • OakBridge Insurance Services
  • 2000 Auburn Drive, Suite 200
  • Beachwood, Ohio 44122
  • (216) 378-7817